Sequel to Canada’s “Mortgage Wars”–the Fight for Deposits

Bank towers are reflected in a window in Toronto’s financial district.

2012 was the year of the mortgage wars for Canada’s major banks, until policymakers finally clamped down on them. The coming year is expected to be one in which the battle for deposits starts to really heat up.

It’s one of the few remaining areas of potential growth for Canada’s big banks. Those institutions are facing slowing mortgage lending and still-sluggish business lending activity.

Deposits are the cheapest and most stable way for banks to fund their operations. And they need the deposits to balance out the massive amount of mortgages that they have to carry on their books, and provide liquidity to meet tighter global capital requirements.

“It has been intense, and will be even more intense,” said David McVay of McVay and Associates, a Toronto-based financial services consulting firm.

“We expect that intensifying competition for loans and deposits will lead to pressure on profitability growth,” Standard & Poor’s Ratings Service said in mid-December, when it downgraded by one notch six Canadian financial firms.

Still, don’t expect posted savings rates to suddenly surge higher from their current rock-bottom rates of 1-2% any time soon. Mr. McVay expects the banks will be more aggressive in offering innovative savings products, like “rate-riser” GICs, where savers get a higher rate each year over the term’s maturity.

Why? Every basis point counts when profit margins are thin.

And, if interest rates start to rise in a year’s time, as the Bank of Canada indicates, banks’ profit margins will be squeezed further. “I think the real challenge is going to be for banks to get people to lock in for longer terms on the term investment side in order to shield themselves from a rising rate environment,” he said.

About Canada Real Time

Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com